Steer Clear of Emerging Markets, UBS Says

By Ben Levisohn

As we all know by now, emerging markets have underperformed the S&P 500 this year. The iShares MSCI Emerging Markets Index ETF (EEM) has dropped 3.9% so far this year, while the SPDR S&P 500 ETF (SPY) has returned 17%.

REUTERS

Don’t expect that to change, says UBS strategist Nick Nelson. He offers three reasons emerging markets have been so weak:

We think that there have been three reasons for the underperformance: (1) global growth surprises have been to the upside, but driven by the US not emerging economies; (2) the dollar is now clearly strengthening, which is not good for emerging markets and; (3) there is a structural problem with corporate profitability in emerging equity markets…

What could boost emerging markets? Nelson explains:

Well, either a strong macro impulse, where the global economy and an improvement in world trade drives emerging economies higher. Or it could come from a bottom-up perspective. Emerging market CEOs could “get religion” and cut costs, as their developed economy counterparts have done. They could also re-leverage balance sheets by increasing payout ratios. But this may take some time and given ownership structures and, in some cases, corporate governance issues, we believe it is unlikely to happen rapidly.

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There are 2 comments

MAY 25, 2013 2:16 P.M.

Mark Massey wrote:

How does a stronger US dollar hurt foreign markets, emerging or developed? One thing a stronger dollar means is more market for foreign produced services and products.

MAY 27, 2013 3:37 P.M.

Rural Scot wrote:

The opposite is true... EMs have been hurt by the Fed's QE programme. The more money that is printed the more the EM central banks have to buy in order to keep their exchange rates favourable. This in turn leads to more inflation in the EMs. So the butterfly effect is QE in the USA leads to inflation in China and Latin America.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.